Costs and Benefits, Part 3

This is a continuation of our in-depth look at the way that cost/benefit analyses are done. We are talking specifically here about a TIGER II project for an overpass in the city of Staples, MN. Before you begin reading this post, we highly recommend that you review Part 1 and especially Part 2, for which is post is a direct continuation.

3. Safety Benefit

The city of Staples has indicated a $1.1 million benefit from improved safety with the construction of a new overpass. This is 2% of the total benefit claimed for the project.

It is difficult to discuss the benefit of increased safety. There are those who will argue that no cost is too great to improve safety. It is hard to argue with that when you, or someone you love, is the one being saved. But, of course, there are constraints that limit what we can do in the name of safety. This is where actuarial science runs up against human emotion, assigning dollar values to lives and limbs. We won't try to get in the middle of that here.

We'll make just three brief notes about safety. First, in a strictly dollar and cents approach, unless the Federal or State government has a liability for an unsafe approach to the railroad track, there is no real financial return to either from this project. There may be a social benefit that accrues, but it will not result in an increase in revenue to the government. The $1.1 million benefit may be a worthy benefit, but it needs to be measured against other worthy social benefits when competing for public dollars.

Second, there seems to be so many other ways to improve safety here that would cost less and be more effective. How about narrowing lanes and slowing traffic? How about more mixed-use zoning, reducing the need to auto trips in general? How about training more volunteer fire fighters or paramedics on both sides of the track? If the city of Staples were handed $10 million and told they must use it to improve public safety, I have a hard time believing that they would choose this project over other endeavors.

Finally, the application includes reference to a fatality that supports the need for the project. From the application (page 16):

On July 16th, 2009, a pedestrian was hit and killed by a BNSF Train just east of the 6th Street crossing.

One of the reasons why we are looking at the Staples application and not another from somewhere else is that this one is in our backyard and we know much of the local context. While this accident was a terrible tragedy, it had nothing to do with an unsafe condition at the tracks nor would it have been prevented by the new overpass. From the Staples World newspaper, July 23, 2009:

Staples police officers said that Allen was on foot and apparently attempting to cross the railroad tracks on Seventh Street in Staples about 11:30 p.m. when he apparently fell to the ground.

"It appears to have been an accident on Allen's part," Police Chief Kyle Huber said. "It is believed that he was intoxicated at the time, he fell and could not get up and out of the way prior to the train striking him. The train crew could see him on the track, they activated the emergency stop and sounded the horn but could not stop in time."

Another local paper added to that report:

"It appeared he was attempting to get across before the train came and it appeared he may have stumbled, based on witness statements," Staples Police Sgt. Doug Case said.

We realize this fatality was thrown in to bolster the case knowing that, like the other benefit data, nobody involved in the grant award decision would question its relevance or accuracy. Even so, it is impossible to argue that this application is an honest assessment of the true benefits that an average American would construe in evaluating this project.

4. Carbon Reduction Benefit

Carbon reduction is the trendy analysis to bolster the case for a project. For the Staples overpass, carbon reduction accounts for 0.2% of the total claimed benefit.

Without getting into a big discussion about the monetary benefit of carbon reduction, I think we can all agree that spending $9.9 million for $122,000 worth of carbon reduction is not money well spent. For those seeking carbon reductions, there are much more efficient ways to spend that kind of money.

And more effective ways too. We will discuss in more detail the land use ramifications in an upcoming post, but history has shown that reducing driving times and wait times will only increase the amount that people drive. It is a near certainty that the nominal amount of carbon reduction from this project would be offset by more frequent and longer trips induced by the added convenience.

It also needs to be noted that, if the Carbon Reduction Benefit is actually realized, it will result in an actual financial loss. The project purports to reduce the amount of gasoline used by 94,033 gallons per year (page 14). The Federal gas tax is $0.184 per gallon and the State of Minnesota gas tax is $0.271 per gallon. This equates to a loss in revenue of $42,800 per year which, when taken over the 20-year analysis period at the 3% discount rate used by the city of Staples, amounts to a Net Present Value of $636,500.

In summary, understanding that our current system creates perverse financial incentives (the government loses money when we drive less), we have a nominal social benefit in carbon reduction of $122,000 and a real financial loss of $640,000 due to decreased gas tax revenues.

5. Maintenance and Operation Benefit

Up to this point, we've basically shown how all of the claimed benefits are social in nature -- they have no actual monetary value that will be captured by any level of government to help pay for this project. As crazy as that may seem, it is dwarfed by the insanity of the long-term maintenance costs the city assumes with this project.

Here is how Staples addresses this cost in their application:

The city of Staples will be responsible for maintenance of the new roadway and bridge. The Benefit/Cost Analysis includes a Present Value Cost of over $121,000 for maintenance of the bridge and roadway for the first 20 years. We will budget necessary funds in our Permanent Improvement Fund for ongoing maintenance and will include major work in our Capital Improvement Plan as needed.

Staples is showing a negative benefit (cost) of $8,140 per year indefinitely. It is not clear if this is the snow plowing, ditch mowing and crack sealing cost (day to day maintenance) or if this includes a budget for future capital improvements. If it is the latter, it is woefully short of what is needed.

Let's just look at their first maintenance project, which will come roughly 25 years after the overpass is constructed. This maintenance project will likely involve only a rehabilitation of the driving surface. Appendix I of their application seems to suggest that this infrastructure is valued at nearly $1 million, with $210,000 of that left as remaining value. This means that the pavement will cost $1 million and be expected to last 25 years, after which it will have a salvage value of $210,000.

We'll take these numbers as presented. To restore the value through a maintenance project would require an expenditure of $780,000 (in present dollars) in 25 years. That means, in the year 2035, the city of Staples will need to have $1.6 million saved (in 2035 dollars). (Note: This is arrived at by using the 3% figure they have used throughout their analysis, although construction prices have historically grown faster than core inflation). If the city of Staples is going to have $1.6 million in 2035, they will need to put aside $45,000 per year in a capital improvements fund once the project is completed.

And that is just to maintain the pavement, which will need to be done once every 25 years.

In fact, even though it is a ridiculously long time in the future, let's use the entire life cycle to demonstrate the fundamental flaw in the city assuming the maintenance. This overpass should last 100 years, at which point in time it will need to be completely rebuilt. Let's assume that it costs the same to rebuild the overpass then as it cost to build it initially now, which is $9.9 million in 2010 dollars. In 2110 dollars, assuming 3% inflation rate that would be a project of $190 million.

Okay, but that's 100 years from now. Who cares?

Let's pretend that Staples does and they prudently started saving for this today. If we stick to the 3% return, then we need to save $304,000 per year. If we average a 5% return on our savings, we only need to save $76,000 per year.

Let's say we wait for 50 years before we start to save for this eventual expense. At that point, even if we got the 5% return, we would need to save $913,000 per year.

Here's the moral of the story: The maintenance cost is the poison pill, but nobody there knows or understands it yet. The city of Staples ranks 148 out of 855 in our list of Most Vulnerable Cities, an analysis we did on city dependence on unstable Local Government Aid payments. They are not even remotely close to having the financial wherewithal over the long term to maintain this overpass. Taking on that obligation today under the allure of "free money" -- something for nothing -- condemns the future residents to an obligation they will not value in proportion to the amount of money they are required to spend on it.

In summary, if we only plan to maintain the pavement in 25 years and not budget for any future capital expense, than the annual capital requirement of $45,000 equates to a net present negative benefit of $670,000. This is a negative benefit accruing directly to the city of Staples.

In summary, today we have shown how the remaining claimed benefits of this project are also social in nature -- they result in no real financial gain -- but that there are real financial costs in terms of lost gas tax revenue ($640,000) and the cost of minimal maintenance ($670,000).

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